Absorption and Variable Costing Income Statements

During the first month of operations ended July 31, YoSan Inc. manufactured 10,300 flat panel televisions, of which 9,600 were sold. Operating data for the month are summarized as follows:

Sales$1,536,000

Manufacturing costs:

Direct materials$772,500

Direct labor226,600

Variable manufacturing cost195,700

Fixed manufacturing cost103,0001,297,800

Selling and administrative expenses:

Variable$124,800

Fixed57,400182,200

Required:

1. Prepare an income statement based on the absorption costing concept.

YoSan Inc.

Absorption Costing Income Statement

For the Month Ended July 31

Sales $

Cost of goods sold:

Cost of goods manufactured $

Inventory, July 31

Total cost of goods sold

Gross profit $

Selling and administrative expenses

Operating income $

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1. Sales - (cost of goods manufactured - ending inventory*) = Gross profit; gross profit - selling and administrative expenses = operating income

*(Manufactured Units - Sold units) x (total manufacturing costs/manufactured units)

2. Prepare an income statement based on the variable costing concept.

YoSan Inc.

Variable Costing Income Statement

For the Month Ended July 31

$

Variable cost of goods sold:

$

$

$

Fixed costs:

$

$

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2. Sales - variable cost of goods sold* = Manufacturing margin; Manufacturing margin - variable selling and administrative expenses = Contribution margin; Contribution margin - (fixed manufacturing costs + fixed selling and administrative expenses) = operating income

*Variable cost of goods sold = Variable cost of goods manufactured - [(Manufactured Units - Sold units) x (variable manufacturing costs/manufactured units)]

3. Explain the reason for the difference in the amount of operating income reported in (1) and (2).

The operating income reported under costing exceeds the operating income reported under costing, due to manufacturing costs that are deferred to a future month under costing.

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3. Recall that fixed factory overhead costs are considered a period expense under variable costing.

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